Second quarter 2015 report

Transcription

North Atlantic Drilling Ltd. (NADL) – Second quarter 2015
results
Highlights from the second quarter
•
North Atlantic Drilling generated second quarter 2015 EBITDA* of $119.3 million
•
North Atlantic Drilling reports second quarter 2015 net income of $44.2 million and earnings per share of
$0.17
Subsequent events
•
North Atlantic Drilling secured a contract extension for the semi-submersible rig West Phoenix with Total E&P
UK Limited, commencing mid-March 2016 and securing work for the unit through the end of August 2016. The
total revenue potential for the contract extension is approximately $62 million.
* EBITDA is defined as 'Earnings Before Interest, Tax, Depreciation and Amortization' and has been calculated
by taking operating profit plus depreciation and amortization.
Financial highlights
Second quarter 2015 results
Consolidated revenues for the second quarter 2015 were $210.7 million compared to $192.0 million for the first
quarter. The primary reason for the increase is the West Phoenix having significantly less downtime in Q2 compared
to Q1, due to BOP repairs.
Operating income for the second quarter was $64.5 million, an increase of $27.6 million compared to the first
quarter operating income of $36.9 million. The increase is primarily due to the West Phoenix as stated above,
combined with lower operating costs as the West Navigator is now off contract and stacked.
Net financial items for the second quarter of 2015 amounted to a loss of $20.5 million. The loss included $25.1
million in interest expenses, gain on financial derivatives of $8.8 million, and foreign exchange loss of $3.4 million
mainly related to the NOK1,500 million bond loan. The first quarter of 2015 incurred a net financial loss of $45.9
million, including interest expenses of $24.6 million, loss on financial derivatives of $34.3 million, and gain on
foreign exchange of $14.4 million mainly related to the NOK1,500 million bond loan.
Income taxes for the second quarter was a $0.2 million benefit, compared to a $2.3 million expense in the first
quarter. The change was primarily due to a net tax benefit recognized during the quarter in respect of return-toprovision ("RTP") adjustments.
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Net income for the second quarter was $44.2 million resulting in a basic earnings per share of $0.17, compared
to net loss of $11.3 million for the first quarter.
The Company reports operating revenues of $402.7 million, operating income of $101.4 million and a net income
of $32.9 million for the six months ended June 30, 2015. This compares to operating revenues of $616.3 million,
operating income of $176.0 million and a net income of $79.9 million for the six months ended June 30, 2014.
Balance sheet as at June 30, 2015
As at June 30, 2015, total assets decreased to $3,484.8 million from $3,528.7 million compared to the previous
quarter.
Total non-current assets decreased to $3,145.2 million from $3,187.6 million compared to the previous quarter.
The decrease was mainly due to depreciation on drilling units.
Total current liabilities decreased to $491.6 million from $526.2 million compared to the previous quarter. The
decrease is largely due to the fall in derivative mark to market liabilities. For further information please see Note
18 to our consolidated financial statements.
Long-term interest bearing debt, including related party debt, decreased to $2,347.7 million from $2,395.2 million
during the quarter. Net interest bearing debt decreased to $2,415.1 million from $2,457.9 million during the quarter.
During the second quarter the Company repaid net $42 million on the $2 billion credit facility and repaid net $12
million on the $475 million credit facility. As at June 30, 2015, the Company had undrawn amounts of $50 million
available on its credit facilities.
Total equity decreased increased to $515.7 million from $458.5 million compared to the previous quarter. The
increase is primarily due to the net income for the quarter, and by other comprehensive income related to unrealized
actuarial pension adjustments.
Cash flow
As at June 30, 2015, cash and cash equivalents decreased to $134.5 million from $138.8 million compared to
the previous quarter.
For the six-month period ending June 30, 2015, net cash provided by operating activities was $197.8 million, net
cash used in investing activities amounted to $21.0 million, and net cash used in financing activities was $157.1
million.
Outstanding shares
As at June 30, 2015, the total number of common shares issued by North Atlantic Drilling was 243,516,514. The
Company held 2,373,863 treasury shares reducing the adjusted number of shares outstanding to 241,142,651.
Operations
During the second quarter, North Atlantic Drilling had five offshore drilling rigs in operation offshore Norway, one
rig operating in the UK sector of the North Sea and one idle rig. Economic utilization* for the second quarter was
95 percent, compared to 89 percent in the first quarter.
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The utilization increased during the second quarter as there was significantly lower downtime compared to the
first quarter. The West Elara had impressive operational performance during the quarter, achieving 100 percent
economic utilization.
* Economic utilization is calculated as total revenue, excluding bonuses, for the period as a proportion of the full
operating dayrate multiplied by the number of days in the period
Commercial, Revenue Backlog and Newbuild Program
North Atlantic Drilling secured a contract extension for the semi-submersible rig West Phoenix with Total E&P UK
Limited, commencing mid-March 2016 and securing work for the unit through the end of August 2016. The total
revenue potential for the contract extension is approximately $62 million. A portion of the $62 million will be paid
during the currently anticipated idle period from the beginning of September 2015 to the middle of March 2016.
The Company has the ability to market the rig for alternate work during this period. As part of the agreement to
extend the West Phoenix, the Company has agreed to a dayrate reduction on the current contract effective from
June 1, 2015 until its expected conclusion at the end of August 2015, resulting in a reduction to the remaining
revenue potential of approximately $16 million.
West Venture completed its drilling contract with Statoil on 21 August 2015 and thereby concluding over 15 years
of employment with this customer. The rig is undergoing preparations to remain idle in Norway with a reduced
crew and will continue to be actively marketed for employment.
Currently, the Company's revenue backlog is $1.0 billion. Average remaining contract length is approximately 19
months excluding clients' options for extensions.
The construction of the harsh environment semi-submersible drilling rig West Rigel is ongoing at Jurong Shipyard
in Singapore. Delivery from the yard is expected during the fourth quarter of 2015. The final yard installment due
upon delivery is approximately $455 million.
Market Development and Outlook
After a moderate rebound in the first quarter, oil prices have subsequently moved lower again and now approaching
the lows witnessed at the beginning of 2015. The low commodity price environment, reductions in oil company
spending plans and an increasing supply / demand imbalance for drilling units all continue to have a negative
impacts on utilizations and pricing in all market segments. As expected, dayrates for new fixture activity remain
at, or below, cash flow breakeven levels in both the floater and jack-up markets. North Atlantic Drilling continues
to believe the market will remain challenging through 2016 with visibility for 2017 and beyond is dependent upon
commodity price stability, oil companies realizing the benefits of their capital spending rationalization programs
and continued fleet attrition.
The Harsh Environment sector has seen limited fixtures at substantially reduced dayrates, with the Johan Sverdrup
award being a recent data point. With the exception of some contract roll-overs, we do not expect to see new
tender awards for work commencing in 2015. The few tenders that are active have commencement dates after
the next winter season and into the second half of 2016 and beyond. Customer conversations continue to be
focused on the renegotiation of existing contracts, often in exchange for extended term. Overall utilization in
Norway and the UK is currently at approximately 71%, down from 93%. It is likely that this downward trend will
continue for the remainder of the year as more units roll off contract and become stacked.
Based on the level of current activity seen in the global market, we expect stacking and scrapping activity to
continue through the second half of 2015 and well into 2016. Scrapping activity has continued in the second
quarter with an incremental 14 floaters designated for retirement and currently 28 cold stacked units. While the
premium jack-up market has yet to see the same levels of stacking and scrapping, there are approximately 50
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idle units out of a total marketed fleet of 480 that are older than 30 years. Additionally there are 100 units that
are rolling off contracts by the end of 2016, which are also older than 30 years. Together, these 150 rigs, or 30%
of the total fleet, represent prime candidates for retirement.
The total marketed supply of floaters in UK and Norway currently stands at approximately 43 units and 29 idle
by the end of 2016. We continue to expect further units to become idle or scrapped over the next two years. A
significant number of units rolling off contract are 25 years or older, and although stacking costs are proving to
be lower than expected, many of these rigs need to complete an SPS and/or repair and upgrades in order to reenter operation. There is a high likelihood that a number of these units will exit the North Sea market or either be
scrapped or cold-stacked with limited reactivation incentive, leading to limited fleet growth. The potential reductions
to active supply combined with significant barriers to entry in the harsh environment regions could lead to increased
supply constraints in the eventual recovery.
North Atlantic is actively marketing the fleet and continues to focus on safe and efficient operations, cost
management and being proactive with all counterparties in this challenging market. Operating performance has
improved in the quarter and we continue to realize benefits from our cost savings initiatives. We have driven
additional efficiencies on idle units by planning early and executing with best in class form to achieve low stacking
costs and maintaining the quality of the units and crews.
Technical utilization for the third quarter to date is 97%.
Corporate
During the second quarter the Company announced the appointment of Mr. Ørjan Svanevik as a Director to fill
a vacancy on the Board. Subsequent to quarter end the Company announced the appointment of Mr. Scott
McReaken to succeed Mr Kavli as Chief Financial Officer.
On August 20, 2015, the Company received notice from the New York Stock Exchange (“NYSE”) that the Company
is no longer in compliance with NYSE’s continued listing standards because the average closing share price of
the Company’s common stock for the consecutive 30 trading-day period ending on August 17, 2015 has fallen
below the requirement to be at least $1.00 per share. This notice does not have an immediate effect on the NYSE
listing of the Company’s common shares.
Subject to the NYSE’s rules, the Company has until February 20, 2016 to regain compliance with the minimum
share price rule. The Company can regain compliance at any time during the six-month cure period ending on
February 20, 2016 if on the last trading day of any calendar month during the cure period the Company's common
shares have a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the
30 trading-day period ending on the last trading day of such month.
The Company intends to comply with the NYSE listing rules and regulations within the six month cure period and
is considering all of its alternatives. If the Company determines to remedy the non-compliance by taking action
that will require shareholder approval, the Company plans to obtain such shareholder approval in a Special
General Meeting to be called during the six month cure period.
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Forward Looking Statements
This report includes forward looking statements. Such statements are generally not historical in nature, and
specifically include statements about the Company’s plans, strategies, business prospects, changes and trends
in its business and the markets in which it operates. These statements are made based upon management’s
current plans, expectations, assumptions and beliefs concerning future events impacting the Company and
therefore involve a number of risks, uncertainties and assumptions that could cause actual results to differ
materially from those expressed or implied in the forward-looking statements, which speak only as of the date of
this news release. Important factors that could cause actual results to differ materially from those in the forwardlooking statements include, but are not limited to offshore drilling market conditions, contract backlog, dry-docking
and other costs of maintenance of the drilling rigs in the Company’s fleet, the cost and timing of shipyard and
other capital projects, the performance of the drilling rigs in the Company’s fleet, delay in payment or disputes
with customers, fluctuations in the international price of oil, international financial market conditions including the
international financial crisis, changes in governmental regulations that affect the Company or the operations of
the Company’s fleet, increased competition in the offshore drilling industry, and general economic, political and
business conditions globally. Consequently, no forward-looking statement can be guaranteed. When considering
these forward-looking statements, you should keep in mind the risks described from time to time in the Company’s
filings with the SEC, including its Registration Statement on Form 20-F.
The Company undertakes no obligation to update any forward looking statements to reflect events or
circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, the
Company cannot assess the impact of each such factors on its business or the extent to which any factor, or
combination of factors, may cause actual results to be materially different from those contained in any forward
looking statement.
August 27, 2015
The Board of Directors
North Atlantic Drilling Ltd.
Hamilton, Bermuda
Questions should be directed to North Atlantic Management AS represented by:
Scott McReaken: Chief Financial Officer
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North Atlantic Drilling Ltd
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Operations for the three and six months ended June 30,
2015 and 2014
Page 7
Unaudited Consolidated Statements of Comprehensive Income for the three and six months
ended June 30, 2015 and 2014
Page 8
Unaudited Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
Page 9
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and
2014
Page 10
Unaudited Consolidated Statements of Changes in Equity for the six months ended June 30,
2015 and 2014
Page 12
Notes to Unaudited Consolidated Financial Statements
Page 13
6
Unaudited Consolidated Statements of Operations
(In millions of US$)
Three month period
ended June 30,
2015
2014
Six month period ended
June 30,
2015
2014
Operating revenues
Contract revenues
Reimbursable revenues
Related party revenues
Total operating revenues
203.7
7.0
—
210.7
268.4
58.1
16.1
342.6
393.5
9.2
—
402.7
494.5
89.8
32.0
616.3
Operating expenses
Vessel and rig operating expenses
Reimbursable expenses
Depreciation
General and administrative expenses
Total operating expenses
70.5
6.0
54.8
14.9
146.2
114.5
55.4
49.2
18.7
237.8
151.7
7.7
110.3
31.6
301.3
221.7
84.5
97.2
36.9
440.3
64.5
104.8
101.4
176.0
(25.1)
8.8
(3.4)
(0.8)
(20.5)
(27.4)
(19.3)
5.0
(0.7)
(42.4)
(49.7)
(25.5)
11.0
(2.2)
(66.4)
(50.7)
(14.0)
(1.5)
(24.7)
(90.9)
Income before income taxes
Income tax benefit/(expense)
Net income
44.0
0.2
44.2
62.4
(2.7)
59.7
35.0
(2.1)
32.9
85.1
(5.2)
79.9
Net income to non-controlling interest
Net income attributable to the shareholders of the
Company
4.1
40.1
2.7
57.0
8.2
24.7
3.0
76.9
Basic earnings per share (US$)
Diluted earnings per share (US$)
0.17
0.17
0.24
0.24
0.10
0.10
0.32
0.32
Operating income
Financial items
Interest expense
Gain/(loss) from derivative financial instruments
Foreign exchange (loss)/gain
Other financial items
Total financial items
See accompanying notes that are an integral part of these Consolidated Financial Statements.
7
Unaudited Consolidated Statements of Comprehensive Income
Three month period
ended June 30,
2015
2014
44.2
59.7
Net income
Other comprehensive income, net of tax:
Unrealized actuarial gain/(loss) relating to defined
benefit pension scheme
Unrealized gain/(loss) on interest rate swaps in the
variable interest entities
Other comprehensive income /(loss) net of tax
Total comprehensive income for the period
Total comprehensive income attributable to noncontrolling interests
Total comprehensive income attributable to the
shareholders
June 30,
2015
2014
32.9
79.9
12.0
(2.7)
21.5
(2.7)
0.8
(0.8)
(0.5)
(0.9)
12.8
(3.5)
21.0
(3.6)
57.0
56.2
53.9
76.3
4.9
1.9
7.7
2.1
52.1
54.3
46.2
74.2
Note: All items of other comprehensive income / (loss) are stated net of tax.
8
Unaudited Consolidated Balance Sheets
(In millions of US$ except for share, and per share data)
June 30, December 31,
2015
2014
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivables, net
Related party receivables
Deferred tax assets
Other current assets
Total current assets
Non-current assets
Deferred tax assets
Newbuilding
Drilling units
Other non-current assets
Total non-current assets
Total assets
LIABILITIES AND EQUITY
Current liabilities
Current portion of long-term debt
Related party liabilities
Trade accounts payable
Tax payable
Other current liabilities
Total current liabilities
Non-current liabilities
Long-term interest bearing debt
Long-term debt to related party
Deferred taxes
Pension liabilities
Other non-current liabilities
Total non-current liabilities
Equity
Common shares of par value US$5 per share: 241,142,651 shares
outstanding at June 30, 2015 and 241,142,651 at December 31, 2014
Additional paid-in capital
Contributed surplus
Contributed deficit
Accumulated other comprehensive loss
Accumulated deficit
Total Shareholder's equity
Non-controlling interest
Total equity
Total liabilities and equity
134.5
8.4
151.3
18.6
2.5
24.3
339.6
116.2
11.0
235.1
34.8
6.5
22.0
425.6
19.9
192.5
2,833.4
99.4
3,145.2
3,484.8
25.3
172.6
2,923.5
104.0
3,225.4
3,651.0
210.3
54.2
3.9
11.1
212.1
491.6
210.2
17.0
6.5
11.8
267.8
513.3
2,025.6
322.1
48.6
48.3
32.9
2,477.5
2,188.2
308.4
54.2
82.9
42.4
2,676.1
1,205.7
1,205.7
48.8
834.3
(1,188.4)
(37.1)
(365.4)
497.9
17.8
515.7
3,484.8
48.6
834.3
(1,188.4)
(58.6)
(390.1)
451.5
10.1
461.6
3,651.0
9
Unaudited Consolidated Statement of Cash Flows
June 30,
2015
2014
Cash flow from operating activities
Net income
Adjustments to reconcile net (loss)/income to net cash provided by operating
activities:
Depreciation
Amortization of deferred loan charges
Amortization of tax assets
Share based compensation expense
Unrealized loss related to financial derivatives
Unrealized foreign exchange (gain) / loss on long-term interest bearing debt
Payments for long-term maintenance
Deferred income tax expense
32.9
79.9
110.3
3.9
4.3
0.2
2.6
(10.2)
(16.3)
(0.5)
97.2
4.0
4.4
0.5
2.4
1.0
(91.7)
19.5
Change in operating assets and liabilities:
Trade accounts receivables
Trade accounts payables
Short-term related party receivables and liabilities
Other receivables and other assets
Other liabilities
Deferred revenue
Net cash provided by operations
83.8
(2.6)
67.9
3.6
(77.2)
(4.9)
197.8
(43.2)
3.3
(42.8)
7.7
(11.3)
13.8
44.7
10
Unaudited Consolidated Statements of Cash Flows
June 30,
2015
2014
Cash flow from investing activities
Additions to newbuildings
Additions to rigs and equipment
Changes in restricted cash
Net cash used in investing activities
Cash flow from financing activities
Installment paid on long-term interest bearing term debt
Proceeds from long-term interest bearing term debt
Repayment of shareholder loan
Proceeds from shareholder loan
Proceeds from related party loan
Repayment of related party loans
Debt fees paid
Proceeds from issuance of equity, net of issuance cost
Dividend paid
Net cash (used in) / provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
(20.0)
(3.6)
2.6
(21.0)
(434.9)
(4.9)
11.3
(428.5)
(157.1)
—
—
—
—
—
—
—
—
(157.1)
(323.5)
1,145.0
(505.0)
142.0
40.0
(110.0)
(11.4)
114.0
(113.2)
377.9
(1.4)
3.0
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
18.3
116.2
134.5
(2.9)
84.1
81.2
Supplementary disclosure of cash flow information
Interest paid
Taxes paid
(39.1)
(3.0)
(39.5)
(4.3)
11
Unaudited Consolidated Statements of Changes in Equity
Share
capital
Balance at
December 31,
2013
Additional
paid-in
capital
Contributed Contributed
surplus
deficit
1,138.1
1.3
834.3
(2.3)
857.5
67.6
46.4
—
—
—
—
114.0
—
114.0
Share based
compensation
—
0.5
—
—
—
—
0.5
—
0.5
Other
comprehensive
loss
—
—
—
—
—
(2.7)
(2.7)
(0.9)
(3.6)
Net income
—
—
—
—
76.9
—
76.9
3.0
79.9
Dividends
declared
—
—
—
—
(113.2)
—
(113.2)
—
(113.2)
Balance at June
30, 2014
1,205.7
48.2
834.3
(1,188.4)
77.6
(42.1)
935.3
(0.2)
935.1
Balance at
December 31,
2014
1,205.7
48.6
834.3
(1,188.4)
(390.1)
(58.6)
451.5
10.1
461.6
Share based
compensation
—
0.2
—
—
—
—
0.2
—
0.2
Other
comprehensive
income / (loss)
—
—
—
—
—
21.5
21.5
(0.5)
21.0
Net income
—
—
—
—
24.7
—
24.7
8.2
32.9
1,205.7
48.8
834.3
497.9
17.8
515.7
Balance at June
30, 2015
(1,188.4)
113.9
(365.4)
(39.4)
Total
equity
NCI
859.8
Issuance of
common shares
(1,188.4)
Accumulated
Total
earnings/
Accumulated Shareholder's
(deficit)
OCI
equity
(37.1)
Dividends per share
During the six months ended June 30, 2015, and 2014, the company declared dividends of nil and $0.48 per ordinary
share respectively.
12
Notes to Unaudited Consolidated Financial Statements
Note 1 – General information
North Atlantic Drilling Ltd (“North Atlantic Drilling”) is an offshore drilling contractor in the North Atlantic Area
providing harsh environment drilling services to the oil and gas industry. North Atlantic Drilling was formed as a
wholly owned subsidiary of Seadrill Limited (“Seadrill” or the “Parent”) on February 11, 2011, under the laws of
Bermuda to acquire certain continuing businesses of Seadrill in the North Atlantic region. The Company was
registered on the Norwegian Over The Counter (N-OTC) list on February 24, 2011. On January 29, 2014 the
Company was listed on the New York Stock Exchange. Following the Initial Public offering in January 2014,
Seadrill owns 70.4% of the Company.
As of June 30, 2015, North Atlantic owned eight offshore drilling units, including one drilling unit under construction.
The fleet consists of one drillship, three jack-up drilling rigs and four semi-submersible drilling rigs (of which one
was under construction). In addition, the Company operated one harsh environment semi-submersible rig on
behalf of Seadrill on a management agreement from November 2013 to August 2014.
As used herein, and unless otherwise required by the context, the terms the “Company”, “we”, “Group”, “our”,
“us” and words of similar import refer to North Atlantic Drilling and its consolidated companies. The use herein of
such terms as group, organization, we, us, our and its, or references to specific entities, is not intended to be a
precise description of corporate relationships.
Basis of presentation
The unaudited interim consolidated financial statements are presented in accordance with generally accepted
accounting principles in the United States of America (US GAAP). The unaudited interim consolidated financial
statements do not include all of the disclosures required in complete annual financial statements. These interim
financial statements should be read in conjunction with our annual report on form 20F for the year ended
December 31, 2014. The year-end balance sheet data that was derived from our audited 2014 financial statements
does not include all disclosures required by accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair statement have been included. The amounts are presented to the nearest hundred thousand
United States dollar (US dollar), unless stated otherwise.
Significant accounting policies
The accounting policies adopted in the preparation of the unaudited interim financial statements are consistent
with those followed in the preparation of our annual audited consolidated financial statements for the year ended
December 31, 2014 unless otherwise included in these unaudited interim financial statements as separate
disclosures.
Related party offsetting
Historically the Company presented balances due to/from Ship Finance on a gross basis. From June 30, 2015
the Company has elected to represent this on a net basis, due to the fact that the right of offset is established in
the long-term loan agreements, and the balances are intended to be settled on a net basis, providing a more
appropriate description of the Company’s related party net debt position. Accordingly the Company has
represented $14.3 million as at December 31, 2014, from Amounts due from related parties (Current assets) and
offset against Long-term debt due to related parties (Non-current liabilities). There is no corresponding offsetting
impact as at June 30, 2015 as the short term trading balances are in a liability position of $30.0 million. Refer to
Note 17 - Related party transactions and Note 20 - Variable Interest Entity.
13
Note 2 - Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2015-03,
Interest - Imputation of Interest, (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which
requires the debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability, consistent with debt discounts and premiums. This
ASU is effective for the first interim period beginning after December 15, 2015 and early adoption is permitted.
The Company has chosen to early adopt this ASU in the second quarter of 2015. As a result, the consolidated
balance sheet as at December 31, 2014 has been restated to reflect this change in accounting principle. $7.9
million of debt issuance costs have been reclassified from Other current assets to a direct deduction from Current
portion of long-term debt and $15.4 million of debt issuance costs have been reclassified from Other non-current
assets to a direct deduction from Long-term debt. As at June 30, 2015, $7.9 million of debt issuance costs have
been presented as a direct deduction from the current portion of long-term debt and $11.3 million of debt issuance
costs have been presented as a direct deduction from long-term debt. The company has disclosed this presentation
in Note 11.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides new
authoritative guidance on the methods of revenue recognition and related disclosure requirements. In April 2015
the FASB proposed to defer the effective date of the guidance by one year. Based on this proposal, public entities
would need to apply the new guidance for annual reporting periods beginning after December 15, 2017, and
interim periods therein and early adoption is not permitted. The Company is in the process of evaluating the
impact of this standard update on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern, which provides new authoritative guidance with regards to management's responsibility to
assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain
circumstances. The ASU will be effective for all entities in the first annual period ending after December 15, 2016
(December 31, 2016 for calendar year-end entities) and early adoption is permitted. The Company does not
expect the adoption of this standard to have a material impact on its consolidated financial statements and related
disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation
Analysis, which made targeted amendments to the current consolidation guidance that could affect all industries.
The FASB issued this guidance to respond to stakeholders’ concerns about the current accounting for consolidation
of certain legal entities. Financial statement users asserted that in certain situations in which consolidation is
ultimately required, deconsolidated financial statements are necessary to better analyze the reporting entity’s
economic and operational results. Previously, the FASB issued an indefinite deferral for certain entities to partially
address those concerns. However, the amendments in this guidance rescind that deferral and address those
concerns by making changes to the consolidation guidance. The ASU will be effective for public entities in the
first annual period, and for interim periods therein, beginning after December 15, 2015 and early adoption is
permitted. The Company is in the process of evaluating the impact of this standard update on its consolidated
financial statements and related disclosures.
Note 3 – Segment information
The Company provides harsh environment offshore drilling services to the oil and gas industry. The Company’s
performance is reviewed by the chief operating decision maker as one reportable segment, mobile units.
14
Revenues from the following customers accounted for more than 10% of the Company’s consolidated revenues:
Three month period
ended June 30,
2015
2014
Statoil
ExxonMobil
Total
Conoco Phillips
Shell
Others
Total
45%
21%
18%
16%
—%
—%
100%
36%
26%
12%
—%
17%
9%
100%
June 30,
2015
2014
47%
21%
15%
17%
—%
—%
100%
40%
23%
12%
—%
15%
10%
100%
Geographic segment data
Revenues are attributed to geographical segments based on the country of operations for drilling activities; that
is, the country where the revenues are generated. The following presents the Company’s revenue by geographic
area:
Three month period
ended June 30,
2015
2014
Norway
United Kingdom
Total
173.6
37.1
210.7
303.1
39.5
342.6
June 30,
2015
2014
342.2
60.5
402.7
543.5
72.8
616.3
As of June 30, 2015, one of the Company’s drilling units, with a net book value of US$661.8 million, was located
in United Kingdom, all other units were located in Norway. As of December 31, 2014, one of the Company’s drilling
units, with a net book value of US$671.9 million, was located in United Kingdom and all other units were located
in Norway. Asset location at the end of the period is not necessarily indicative of the geographic distribution of
the revenues or operating profits generated by such assets during the period.
15
Note 4 – Taxation
Income taxes consist of the following:
Three month period
ended June 30,
2015
2014
June 30,
2015
2014
Current tax (expense)/benefit:
Bermuda
Foreign
—
0.4
—
13.5
—
(1.7)
—
18.9
—
2.1
(2.3)
—
(13.9)
—
4.2
(2.3)
(4.6)
—
(19.5)
(4.6)
(2.7)
4.3%
(2.1)
6.0%
Deferred tax (expense)/benefit:
Bermuda
Foreign
Amortization of tax effect on internal sale of assets
Total income taxes
Effective tax rate
0.2
(0.5)%
(5.2)
6.1%
The Company may be taxable in more than one jurisdiction based on its drilling rig operations. A loss in one
jurisdiction may not be offset against taxable income in another jurisdiction. Thus, the Company may pay tax
within some jurisdictions even though it might have an overall loss at the consolidated level.
The income taxes for the six months ended June 30, 2015 and 2014 differed from the amount computed by
applying the statutory income tax rate of 0% due to operations in foreign jurisdictions with different applicable tax
rates as compared to Bermuda.
The effective tax rate for the six months ended June 30, 2015 is 6.0%. Excluding financial items and tax items
recorded discretely, the effective tax rate is 10.7%.
Three month period
ended June 30,
June 30,
2015
2014
2015
2014
—
—
—
—
(2.3)
(4.6)
(2.3)
(4.6)
2.5
2.5
(0.4)
(0.6)
Income taxes at statutory rate
Amortization of tax effect on internal sale of assets
Effect of taxable income in various countries
Total income taxes
0.2
(2.7)
(2.1)
(5.2)
Deferred Income Taxes
Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax purposes. The net deferred tax
assets (liabilities) consist of the following:
16
Deferred Tax Assets:
2015
2014
Pension
Contracts
Loss carry forward
Gross deferred tax asset
7.5
1.5
13.4
22.4
21.7
3.6
6.5
31.8
Deferred Tax Liability:
2015
2014
Property plant and equipment
Tax depreciation
Pensions
Gross deferred tax liability
Net deferred tax liability
48.6
—
—
48.6
50.7
0.3
3.2
54.2
(26.2)
(22.4)
Net deferred taxes are classified as follows:
2015
2014
Short-term deferred tax asset
Long-term deferred tax asset
Long-term deferred tax liability
Net deferred tax (liability)/asset
2.5
19.9
(48.6)
(26.2)
6.5
25.3
(54.2)
(22.4)
As of June 30, 2015, deferred tax assets related to net operating loss ("NOL") carryforwards was $13.4 million
(December 31, 2014: $6.5 million), which can be used to offset future taxable income. NOL carryforwards were
generated in Norway and UK and will not expire.
Note 5 – Earnings per share
The computation of basic earnings per share (“EPS”) is based on the weighted average number of shares
outstanding during the period. Diluted EPS includes the effect of the assumed conversion of potentially dilutive
instruments.
The components of the numerator for the calculation of basic and diluted EPS are as follows:
Three month period
ended June 30,
2015
2014
Net income attributable to shareholders
Effect of dilution
Diluted net income attributable to shareholders
40.1
—
40.1
17
57.0
0.2
57.2
June 30,
2015
2014
24.7
—
24.7
76.9
0.4
77.3
The components of the denominator for the calculation of basic and diluted EPS are as follows:
Three month period
ended June 30,
2015
2014
June 30,
2015
2014
Basic earnings per share:
Weighted average number of common shares
outstanding
241.1
241.1
241.1
239.1
Diluted earnings per share:
Weighted average number of common shares
outstanding
241.1
241.1
241.1
239.1
Effect of dilution
Diluted numbers of shares
—
241.1
0.3
241.4
—
241.1
0.3
239.4
0.17
0.17
0.24
0.24
0.10
0.10
0.32
0.32
Basic earnings per share (US$)
Diluted earnings per share (US$)
Note 6 – Accounts receivable
Accounts receivable are presented net of allowances for doubtful accounts. The allowance for doubtful accounts
receivables at June 30, 2015 was $15.0 million (December 31, 2014: $8.3 million).
The Company did not recognize any bad debt expense in 2015 and 2014, but has instead reduced contract
revenue for the disputed amounts.
Note 7 – Other current assets
Reimbursable amounts due from customers
Deferred tax effect of internal transfer of assets – current portion
Prepaid expenses
Derivative financial instruments 1
VAT receivables
Other
Total other current assets
(1)
2015
2014
6.4
6.2
9.3
9.1
3.8
0.9
2.6
2.7
2.1
3.0
0.1
0.1
24.3
22.0
Derivative financial instruments consist of unrealized gain on interest rate swaps. Additional disclosure has
been provided in Note 18.
18
Note 8 – Newbuildings
Six months
Year ended
ended June December 31,
30, 2015
2014
172.6
312.9
19.9
448.9
—
(589.2)
192.5
172.6
Opening balance at the beginning of the period
Additions
Re-classified as drilling units
Closing balance at the end of the period
The additions in 2015 relate to the West Rigel and include capitalized interest expenses.
The reclassification to drilling units is related to the West Linus which commenced operations in May 2014.
Note 9 – Drilling units
2015
2014
4,099.9
4,079.7
(1,266.5)
(1,156.2)
Cost
Accumulated depreciation
Net book value
2,833.4
2,923.5
Depreciation expense was $110.3 million and $97.2 million for the six months period June 30, 2015, and 2014,
respectively.
Note 10 – Other non-current assets
Deferred tax effect of internal transfer of assets - Long-term portion
Other
Total other non-current assets
19
June 30,
2015
December 31,
2014
97.4
2.0
99.4
102.0
2.0
104.0
Note 11 – Debt
As of June 30, 2015 and December 31, 2014, the Company had the following debt facilities:
2015
2014
Credit facilities:
US$2,000 facility
US$475 facility
Total credit facilities principal
1,283.4
377.5
1,660.9
1,366.7
451.3
1,818.0
Bonds:
Bond MNOK1500*
Bond US$600 million**
Total bonds principal
191.3
600.0
791.3
201.4
600.0
801.4
Related party loans:
Loan from related party
Total debt principal
125.0
2,577.2
110.7
2,730.1
Less: current portion of long term debt
Less: Related party share of long term debt
Long-term portion of debt principal
(218.2)
(322.1)
2,036.9
(218.1)
(308.4)
2,203.6
*Seadrill is the owner of 5.5% of the bond, this portion is presented as related party liability in the Company's
consolidated balance sheet.
** Seadrill is the owner of 31.1% of the bond, this portion is presented as related party liability in the Company's
consolidated balance sheet.
The company has adopted Accounting Standards Update (ASU) 2015-03, Interest - Imputation of Interest,
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs as at June 30, 2015, which requires the
debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts and premiums. This ASU is effective
for the first interim period beginning after December 15, 2015 and early adoption is permitted. The Company has
chosen to early adopt this ASU in the second quarter of 2015. As a result, the consolidated balance sheet as at
December 31, 2014 has been restated to reflect this change in accounting principle. $7.9 million of debt issuance
costs have been reclassified from Other current assets to a direct deduction from Current portion of long-term
debt and $15.4 million of debt issuance costs have been reclassified from Other non-current assets to a direct
deduction from Long-term debt. As at June 30, 2015, $7.9 million of debt issuance costs have been presented
as a direct deduction from the current portion of long-term debt and $11.3 million of debt issuance costs have
been presented as a direct deduction from long-term debt.
As at June 30, 2015
(In $ millions)
Long-term portion of debt
Total debt
20
Principal
outstanding
Less: Debt
Issuance
Costs
Total Debt
218.2
2,036.9
2,255.1
(7.9)
(11.3)
(19.2)
210.3
2,025.6
2,235.9
As at December 31, 2014
(In $ millions)
Long-term portion of debt
Total debt
Principal
outstanding
Less: Debt
Issuance
Costs
Total Debt
218.1
2,203.6
2,421.7
(7.9)
(15.4)
(23.3)
210.2
2,188.2
2,398.4
The outstanding debt as of June 30, 2015 is repayable as follows:
Twelve months ended June 30, 2016
Twelve months ended June 30, 2021 and thereafter
Total debt principle
June 30,
218.1
1,164.2
47.5
1,022.4
—
125.0
2,577.2
Credit facilities
$2,000 million senior secured credit facility
In April 2011, the Company entered into a $2,000 million senior secured credit facility to fund the Company’s
acquisition of West Phoenix, West Navigator, West Alpha, West Epsilon, West Venture, West Elara and West
Linus. The $2,000 million senior secured credit facility has a 6 year term payable quarterly with a balloon payment
of $1,000 million at maturity. The loan bears interest of Libor plus 2.0% per annum.
In February 2015, North Atlantic Drilling received approval to amend its $2,000 million Senior Secured Credit
Facility. Under the terms of the agreement, Seadrill has provided a guarantee for the credit facility in exchange
for amendments to the covenant package, principally replacing the existing financial covenants with financial
covenants within Seadrill's secured credit facilities. The guarantee fee charged by Seadrill is 0.3% per annum of
the outstanding principal.
$475 million secured term loan
In October 2013, SFL Linus Ltd entered into a $475 million secured term loan and revolving credit facility with a
syndicate of banks to fund the acquisition of West Linus, which has been pledged as security. SFL Linus Ltd drew
down on the loan at the delivery date of the rig in February 2014. During the six months ended June 30, 2015
the revolving credit tranche of $50 million was repaid.
In February 2015, North Atlantic Drilling received approval to amend its $475 million Credit Facility. Under the
terms of the agreement, Seadrill has provided a guarantee for the facility in exchange for amendments to the
covenant package, principally replacing financial covenants with financial covenants within Seadrill's secured
credit facilities. The guarantee fee charged by Seadrill is 0.3% per annum of the outstanding principal.
Amendment to the credit facilities
The financial covenants within the Company's secured facilities and NOK bond are measured at the Seadrill
consolidated level and are in line with Seadrill's covenants on its secured facilities.
21
In May 2015, the Company executed an amendment to the covenants contained in all of its secured credit facilities.
Under the amended terms, the permitted leverage ratio has been amended to the following:
•
•
•
6.0:1, from and including the financial quarter starting on July 1, 2015 and including the financial quarter
ending on September 30, 2016;
5.5:1, from and including the financial quarter starting on October 1, 2016 and including the financial
quarter ending December 31, 2016;
4.5:1, from and including the financial quarter starting on January 1, 2017 until the final maturity date.
In connection with the amendment, effective from July 1, 2015, an additional margin may be payable on the senior
secured credit facilities as follows:
•
•
•
.125 percent per annum if the leverage ratio is 4.50:1 up to and including 4.99:1;
.25 percent per annum if the leverage ratio is 5.00:1 up to and including 5.49:1;
.75 percent per annum if the leverage ratio is 5.50:1 up to and including 6.00:1
Bonds
$600 million senior unsecured bond
On January 31, 2014, a $600 million senior unsecured bond was issued with maturity date January 2019. The
notes bear a fixed coupon of 6.25%. As at June 30, 2015, Seadrill is the holder of 31.1% of the bond, which
amounts to $186.6 million (December 31, 2014: 31.1% or $186.6 million).
NOK 1,500 million senior unsecured bond
On October 30, 2013, a NOK1,500 million senior unsecured bond was issued with maturity date October 2018.
The bond bears interest at 3-months NIBOR plus a margin of 4.40%. The bond was subsequently swapped to
US dollars with a fixed rate of 6.18% per annum until maturity. As at June 30, 2015, Seadrill is the holder of 5.5%
of the bond, which amounts to $10.5 million (December 31, 2014: 5.5% or $11.1 million).
In February 2015, the Company received approval from its Norwegian bondholders to amend the bond agreement
for its NOK1,500 million Senior Unsecured Bond maturing in 2018. Under the terms of the agreement, Seadrill
has provided a guarantee for the bond issue in exchange for amendments to the covenant package, principally
replacing the current financial covenants with the financial covenants within Seadrill's NOK bonds. The guarantee
fee charged by Seadrill is 0.3% per annum of the outstanding principal.
Related party loans
Seadrill provided the Company with an unsecured revolving shareholder loan of $85 million. No draw downs were
made on this facility as at December 31, 2014 and no draw downs were made during the three months ended
March 31, 2015. The facility matured in January 30, 2015.
Ship Finance granted the SF Linus Ltd, a loan of $195 million in June 2013. The maturity date is June 30, 2029.
SFL Linus Ltd repaid US$70 million in 2014, and the outstanding balance as of June 30, 2015 is $125 million.
22
Note 12 – Other current liabilities
June 30,
2015
109.6
18.5
37.6
19.8
6.4
20.2
212.1
Derivative financial instruments (1)
Accrued interest expense
Accrued expenses
Employee withheld taxes, social security and vacation payment
Withheld business taxes
Short term portion of deferred revenues
Total other current liabilities
(1)
December 31,
2014
109.4
19.5
65.6
33.2
20.2
19.9
267.8
Derivative financial instruments consist of unrealized losses on interest rate swaps, cross currency swaps and
foreign exchange rate forwards. Additional disclosure has been provided in Note 18.
Note 13 – Other non-current liabilities
June 30,
2015
29.9
3.0
32.9
Deferred revenue
Derivative financial instruments (1)
Total other non-current liabilities
(1)
December 31,
2014
39.9
2.5
42.4
Derivative financial instruments consist of unrealized losses on interest rate swaps. Additional disclosure has
been provided in Note 18.
Note 14 – Share capital
June 30, 2015
Shares US$ millions
December 31, 2014
All shares are common shares of US$5.00 par
value each
Authorized share capital
400,000,000
2,000.0
400,000,000
2,000.0
Issued and fully paid share capital
Treasury shares held by Company
Outstanding shares in issue
243,516,514
(2,373,863)
241,142,651
1,217.6
(11.9)
1,205.7
243,516,514
(2,373,863)
241,142,651
1,217.6
(11.9)
1,205.7
23
Shares US$ millions
Note 15 – Accumulated Other Comprehensive Loss
Actuarial loss relating to pension
Total accumulated other comprehensive loss, net of tax
2015
2014
(37.1)
(58.6)
(37.1)
(58.6)
For actuarial loss related to pension, the accumulated applicable amount of deferred income taxes related to
companies domiciled in Norway, where the tax rate is 27%, amounted to $13.8 million at June 30, 2015
(December 31, 2014 $21.7 million).
Note 16 – Pension benefits
The Company has a defined benefit pension plan covering substantially all employees in Norway. A significant
part of this plan is administered by a life insurance company. In addition, the Company has defined contribution
plan for all new onshore employees. Under this scheme, the Company contributes to the employee’s pension
plan amounts ranging from five to eight percent of the employee’s annual salary.
For onshore employees in Norway, continuing with the defined benefits plan, the primary benefits are retirement
pension of approximately 66% of salary at retirement age of 67 years, together with a long-term disability pension.
The retirement pension per employee is capped at an annual payment of 66% of the total of 12 times the Norwegian
Social Security Base. Most employees in this group may choose to retire at 62 years of age on a pre-retirement
pension. Offshore employees in Norway have retirement and long-term disability pension of approximately 60%
of salary at retirement age of 67. Offshore employees on mobile units may choose to retire at 60 years of age on
a pre-retirement pension.
The expenses for our defined benefit pension plans for the twelve month period ended June 30, 2015 were as
follows:
June 30,
2015
2014
6.5
8.6
1.9
3.6
8.4
12.2
(1.7)
(3.0)
0.4
0.5
7.1
9.7
1.0
1.4
1.8
1.1
—
(0.3)
9.9
11.9
Benefits earned during the period
Interest cost on prior years' benefit obligation
Gross pension cost for the period
Expected return on plan assets
Administration charges
Net pension cost for the period
Social security cost
Amortization of actuarial losses
Amortization of prior service cost
Total net pension cost
Employer Contributions
In the three months period ended March 31, 2015 and 2014, contributions of $12.5 million and $16.7 million,
respectively, were made to the defined benefit pension plans.
24
The funded status of the defined benefit plan
2015
2014
157.6
186.5
(115.1)
(113.8)
42.5
72.7
5.8
10.2
48.3
82.9
Projected benefit obligations
Plan assets at market value
Accrued pension liability exclusive social security
Social security related to pension obligations
Accrued pension liabilities
Change in benefit obligations
Six months
Year ended
30, 2015
2014
Benefit obligations at beginning of the period
Current service cost
Interest cost
Change in unrecognized actuarial (gain) / loss
Settlement
Benefits paid
Foreign currency translations
Benefit obligations at end of the period
186.5
6.5
1.9
(12.5)
(14.0)
(1.1)
(9.7)
157.6
176.1
14.0
6.8
23.5
—
(1.9)
(32.0)
186.5
Change in pension plan assets
Six months
Year ended
30, 2015
2014
Fair value of plan assets at beginning of the period
Expected return on plan assets
Change in unrecognized actuarial gain / (loss)
Administration charges
Contribution by employer
Settlement
Benefits paid
Foreign currency translations
Fair value of plan assets at end of the period
113.8
1.7
1.6
(0.4)
12.8
(7.5)
(1.1)
(5.8)
115.1
125.8
4.9
(8.9)
(0.9)
16.9
—
(2.0)
(22.0)
113.8
During the period a number of employees left the Company and as a result the defined benefit scheme transferred
the pension liability for these employees to the life insurance company administering the scheme. The difference
between the reduction in benefit obligation and the plan assets transferred to the life insurance company has
been recognized within "Other comprehensive income". The settlement is not deemed to be significant in the
context of the overall scheme and as such net unrecognized actuarial losses have not been recycled as a result
of the settlement.
Assumptions used in calculation of pension obligations
The discount rate assumption is based on the covered bond rate in Norway. This assumption was revised during
the period from 2.30% to 2.60%, which resulted in an unrealized actuarial gain for the period.
25
2015
2014
Rate of compensation increase at the end of period
Discount rate at the end of period
Prescribed pension index factor
Expected return on plan assets for the period
Employee turnover
Expected increases in Social Security Base
2.75%
2.60%
1.20%
3.20%
4.00%
2.50%
2.75%
2.30%
1.20%
3.20%
4.00%
2.50%
Note 17 – Related party transactions
The Company transacts business with the following related parties, being companies in which Seadrill’s principal
shareholder, Hemen Holdings Ltd. (herein referred to as “Hemen”), and companies associated with Hemen, have
a significant interest:
- Seadrill
- Ship Finance International Limited ("Ship Finance")
- Frontline Management (Bermuda) Limited ("Frontline")
- Archer Limited ("Archer")
- Sevan Drilling Limited ("Sevan")
The Company has entered into the following significant agreements with related parties:
Seadrill transactions
$600 million senior unsecured bond
Seadrill is the holder of 31.1% of the $600 million bond, which amounts to $186.6 million (December 31, 2014:
31.1% or $186.6 million). The bond was entered into in January 2014 with a fixed coupon of 6.25% and matures
in January 2019. Interest due to Seadrill for the six months ended June 30, 2015 was $4.7 million (six months
ended June 30, 2014: $4.1 million).
$85 million Revolving Credit Facility
Seadrill provided the Company with an unsecured revolving shareholder loan of $85 million. No draw downs were
made on this facility as at December 31, 2014 and no draw downs were made during the six months ended
June 30, 2015. The facility matured in January 30, 2015. Interest and commitment fee charged relating to the
shareholder loan from Seadrill for the six months ended June 30, 2015 and 2014 amounted to $0.1 million and
$0.3 million, respectively.
NOK1500 million senior unsecured bond
Seadrill is the holder of 5.5% of the NOK1500 bond loan, which amounts to $10.5 million (December 31, 2014:
5.5% or $11.1 million). Interest due to Seadrill for the six months ended June 30, 2015 was $0.2 million (six months
ended June 30, 2014: nil).
26
Financial covenants and debt guarantees
In February 2015, the Company received approval from its Norwegian Bondholders to amend the Bond Agreement
for its NOK1.5 billion Norwegian Bond maturing in 2018. Under the terms of the agreement, Seadrill will provide
a guarantee for the Bond Issue in exchange for amendments to the covenant package, principally replacing the
current financial covenants with the financial covenants within Seadrill's NOK bonds. Additionally, the Company
received approval to amend its $2 billion credit facility and $475 million term loan and revolving credit facility.
Under the terms of the agreements, Seadrill will provide a guarantee for the credit facilities in exchange for
amendments to the covenant package, principally replacing the existing financial covenants with financial
covenants within Seadrill's secured credit facilities. This amendment to the covenants was applicable to the period
ended December 31, 2014. As such there are no longer separate financial covenants contained within the
Company's credit facilities or bond agreements. The guarantee fees charged by Seadrill is 0.3% per annum of
the outstanding principal. The total guarantee fee for the six months ended June 30, 2015 was $1.2 million.
Performance guarantees
Seadrill provides performance guarantees in connection with the Company’s drilling contracts, and charges the
Company an annual fee of 1% of the guaranteed amount to provide these guarantees. The total amount of such
guarantees was $225.0 million at June 30, 2015 and $250 million at December 31, 2014. The incurred fee was
$1.2 million and $1.3 million for the six months ended June 30, 2015 and 2014, respectively. The Company has
agreed to reimburse Seadrill for all claims made against Seadrill under the performance guarantees.
Management services
North Atlantic Management provides all day-to-day management functions to the Company and its subsidiaries
in accordance with the terms of the General Management Agreement. North Atlantic Management has contracted
in senior management services from Seadrill Management Ltd and Seadrill Management AS in accordance with
the terms of the Management and Administrative Services Agreement. The agreement can be terminated by
either party at one month's notice. In consideration of the services provided to the Company, the Company pays
Seadrill a fee that includes the operating costs attributable to the Company plus a margin of 8%. For the six month
period ended June 30, 2015 and 2014, Seadrill had charged North Atlantic Management a total fee of $11.7
million and $9.0 million, respectively, for providing the services under the Services Agreement.
Operation and Management of the West Hercules
The West Hercules, a harsh environment, semi-submersible drilling rig, is owned by a wholly-owned subsidiary
of Ship Finance, a related party, and is controlled by Seadrill through a bareboat charter agreement that expires
in 2023. Until October 31, 2013, the company operated and managed this rig pursuant to an operational bareboat
charter agreement that the Company entered into with Seadrill in July 2012. Subsequently the company entered
into a management agreement with Seadrill which replaced the bareboat charter agreement effective from
November 1, 2013, pursuant to which the Company operated and managed the West Hercules when it was
employed under the drilling contract with Statoil. Under the management agreement, North Atlantic has charged
Seadrill a management fee of $2.4 million and crew costs of $13.5 million for six months ended June 30, 2014.
In August 2014, the operation and management of the West Hercules was transferred to Seadrill.
Archer transactions
Engineering Services
North Atlantic received engineering services from subsidiaries of Archer Ltd. The charged amount was $1 million
and $1 million for the six months period ended June 30, 2015 and 2014, respectively. Archer Ltd. is a company
in which Seadrill Limited is a large shareholder.
27
Frontline transactions
Management Services
The Company and its subsidiaries incorporated in Bermuda receive corporate secretarial and certain other
administrative services applicable to the jurisdiction of Bermuda from Frontline Management (Bermuda) Ltd. The
fee was less than $1.0 million and less than $1.0 million for the six month period ended June 30, 2015 and 2014,
respectively. Frontline Management (Bermuda) Ltd. is a wholly owned subsidiary of Frontline Ltd., a company
in which Hemen Holding Limited is a large shareholder.
Ship Finance transactions
Sale and leaseback contract
The Company entered into sale and leaseback transaction with Ship Finance for the jack-up rig, West Linus, in
June 2013. The total consideration was $600 million, The West Linus is chartered back to North Atlantic on a
bareboat charter in a period of 15 years, wherein North Atlantic has been granted four purchase options. The
West Linus was delivered from the yard in February 2014. Ship Finance has an option to sell the rig back to North
Atlantic at the end of the charter period. As at June 30, 2015, the unit is reported under Drilling Units in the
Company’s balance sheet. Additional disclosure about the VIE has been provided in Note 20.
$125 million Loan Facility:
Ship Finance granted the VIE company, SFL Linus Ltd, an unsecured loan of $195 million in June 2013 to be
repaid at the earlier of June 30, 2029 or date of sale of the West Linus rig. The proceeds of this loan was used
to finance the acquisition of the West Linus. The loan did not bear interest until the rig was delivered from the
yard. The loan was reduced to $125 million in the period ended March 31, 2014. As at June 30, 2015 the outstanding
balance is $125 million (December 31, 2014: $125 million) and is presented as long term debt to related parties
on our balance sheet. The interest on the facility is 4.5% per annum. Interest charged for the six month period
ended June 30, 2015 was $2.8 million (six month period ended June 30, 2014: $2.8 million).
Related Party Balances
2015
2014
Related party receivables
Seadrill
Total related party receivables
Related party payables
Seadrill
Ship Finance International
Total related party payables
Long term debt to related party
US$600 Bond, Seadrill Ltd share 31.1%
MNOK1500 Bond, Seadrill Ltd share 5.5%
Long term related party loan from Ship Finance *
Total long term debt to related party
18.6
18.6
34.8
34.8
24.2
30.0
54.2
17.0
—
17.0
186.6
10.5
125.0
322.1
186.6
11.1
110.7
308.4
Receivables and payables with related parties arise when the Company pays an invoice on behalf of a related
party and vice versa. Receivables and payables are generally settled monthly in arrears.
28
Other than the loans specifically mentioned, the amounts due to and from Seadrill Limited and its subsidiaries
under business operations are unsecured, interest-free and intended to be settled in the ordinary course of
business.
* Historically the Company presented balances due to/from Ship Finance on a gross basis. From June 30, 2015
the Company has elected to represent this on a net basis, due to the fact that the right of offset is established in
the long-term loan agreements, and the balances are intended to be settled on a net basis, providing a more
appropriate description of the Company’s related party net debt position. Accordingly the Company has represented $14.3 million as at December 31, 2014, from Amounts due from related parties (Current assets) and
offset against Long-term debt due to related parties (Non-current liabilities). There is no corresponding offsetting
impact as at June 30, 2015 as the short term trading balances are in a liability position of $30.0 million.
Note 18 – Risk management and financial instruments
The majority of the Company's gross earnings from our drilling units are receivable in US dollars and the majority
of the Company's other transactions, assets and liabilities are denominated in US dollars, the functional currency
of the Company. However, the Company has operations and assets in countries with currency other than US
dollars and incurs expenditures in other currencies, causing its results from operations to be affected by fluctuations
in currency exchange rates. The Company is also exposed to changes in interest rates on floating interest rate
debt. There is thus a risk that currency and interest rate fluctuations will have a negative effect on the value of
the Company's cash flows.
Interest rate risk management
The Company's exposure to interest rate risk relates mainly to its floating interest rate debt and balances of
surplus funds placed with financial institutions. This exposure is managed through the use of interest rate swaps.
The Company's objective is to obtain the most favorable interest rate borrowings available without increasing its
foreign currency exposure. Surplus funds are generally placed in fixed deposits with reputable financial institutions,
yielding higher returns than are available on overnight deposits in banks. Such deposits generally have shortterm maturities, in order to provide the Company with flexibility to meet all requirements for working capital and
capital investments. The extent to which the Company utilizes interest rate swaps and other derivatives to manage
its interest rate risk is determined by the net debt exposure.
Interest rate swap agreements not qualified for hedge accounting
As at June 30, 2015, the Company had interest rate swap agreements with an outstanding principal amount of
$1,300 million (December 31, 2014: $1,300 million). The agreements do not qualify for hedge accounting, and
accordingly any changes in the fair values of the swap agreements are included in the consolidated statement
of operations under "(Loss)/gain from derivative financial instruments.” The total fair value of the interest rate
swaps outstanding at June 30, 2015 amounted to a liability of $33.4 million and an asset of $2.0 million due to
master netting agreements with our counterparties (December 31, 2014: liability $36.6 million and asset $2.7
million).
The Company did not enter into any other new swap agreements, nor change any existing swap agreements, in
the six month period ended June 30, 2015.
29
The Company’s outstanding interest rate swap agreements as of June 30, 2015 were as follows:
Outstanding principal
(In US$ millions)
200
200
100
200
100
100
100
100
200
Receive rate
Pay rate
Length of contract
3 month LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
2.14%
2.14%
2.74%
2.57%
2.56%
2.17%
2.17%
1.15%
2.92%
May 2011 - Jan 2016
May 2011 - Jan 2016
May 2012 - May 2017
June 2012 - June 2017
June 2012 - June 2017
Aug 2012 - Aug 2017
Aug 2012 - Aug 2017
Dec 2012 – Dec 2019
Mar 2016 - Mar 2021
Interest rate hedge accounting
The Ship Finance subsidiary consolidated by the Company as a VIE, SFL Linus Ltd, (refer to Note 20 - Variable
Interest Entities) has entered into interest rate swap agreements in order to mitigate its exposure to variability in
cash flows for future interest payments on the loan taken out to finance the acquisition of West Linus. These
interest rate swaps qualify for hedge accounting and any changes in their fair value are included in "Other
comprehensive income". Below is a summary of the notional amount, fixed interest rate payable and duration of
the interest rate swaps.
Outstanding principal
(in US$ Millions)
215.7
4.0
4.0
Receive rate
Pay rate
Length of contract
3 month LIBOR
1 month LIBOR
1 month LIBOR
1.77%
2.01%
2.01%
Dec 2013 - Dec 2018
Mar 2014 - Oct 2018
Mar 2014 - Nov 2018
The total fair value of the interest rate swaps outstanding at June 30, 2015 amounted to a liability of $3.0 million
(December 31, 2014: a liability of $2.5 million). In the six month period ended June 30, 2015, the above VIE Ship
Finance subsidiary has recorded fair value losses on interest rate swaps of $0.5 million (six month period ended
June 30, 2014: losses of $0.9 million). Gain or loss is recorded by the VIE in "Other comprehensive income" but
due to its ownership by Ship Finance this is allocated to "Non-controlling interest" in our statement of changes
in equity. Any change in fair value resulting from hedge ineffectiveness is recognized immediately in earnings.
The VIE, and therefore North Atlantic, did not recognize any gain or loss due to hedge ineffectiveness in the
consolidated financial statements during the six month period ended June 30, 2015.
Cross currency interest rate swaps not qualified for hedge accounting
At June 30, 2015 the Company had outstanding cross currency interest rate swaps with a principal amount of
$253.5 million (December 31, 2014: $253.5 million). These agreements do not qualify for hedge accounting and
accordingly any changes in the fair values of the swap agreements are included in the consolidated statement
of operations under "Income/loss on derivative financial instruments". The total fair value of cross currency interest
rate swaps outstanding at June 30, 2015 amounted to a liability of $76.2 million (December 31, 2014: a liability
of $64.4 million). The fair value of the cross currency interest rate swaps are classified within other current liabilities
in the balance sheet.
30
Foreign currency risk management
The Company uses foreign currency forward contracts to manage its exposure to foreign currency risk on certain
assets, liabilities and future anticipated transactions. Such derivative contracts do not qualify for hedge accounting
treatment and are recorded in the balance sheet under other current assets if the contracts have a net positive
fair value, and under other current liabilities if the contracts have a net negative fair value. At June 30, 2015, the
Company had forward contracts to sell $40 million in July 2015 at an exchange rates between NOK 7.9493 and
NOK 7.9716 per US dollar. The total fair value of currency forward contracts at June 30, 2015 amounted to an
asset of $0.6 million (December 31, 2014: a liability of $8.4 million).
The gains and losses of the derivatives for the period were as follows:
Three month period
ended June 30,
2015
2014
0.8
(9.7)
—
(2.1)
6.6
(7.8)
1.4
0.3
8.8
(19.3)
Interest rate swaps
Ship Finance Linus Interest rate swaps
Cross currency interest rate swap agreements
Foreign currency agreements
Total Derivatives Gain/(Loss)
Six month period
ended June 30,
2015
2014
(9.3)
(9.7)
(0.8)
(2.1)
(14.0)
(2.3)
(1.4)
0.1
(25.5)
(14.0)
Fair values
The carrying value and estimated fair value of the Company's financial instruments at June 30, 2015 and
December 31, 2014 are as follows:
June 30, 2015
Fair
Carrying
value
value
134.5
134.5
8.4
8.4
218.2
218.2
1,442.7
1,442.7
323.3
413.4
147.9
180.8
Cash and cash equivalents
Restricted cash
Long-term floating rate debt
$600 million fixed interest bond
NOK 1,500 million floating interest bond
$600 million fixed interest bond - owned by related
party
NOK 1,500 million floating interest bond - owned by
related party
Long term fixed interest loan to related party
December 31, 2014
Fair
Carrying
value
value
116.2
116.2
11.0
11.0
218.1
218.1
1,599.9
1,599.9
270.3
413.4
123.8
190.3
146.0
186.6
122.0
186.6
8.6
125.0
10.5
125.0
6.6
125.0
11.1
125.0
The carrying value of cash and cash equivalents, which are highly liquid, and restricted cash, is a reasonable
estimate of fair value and categorized at level 1 on the fair value measurement hierarchy.
The fair value of the current and long-term portion of floating rate debt is estimated to be equal to the carrying
value since it bears variable interest rates, which are reset regularly and usually in the range between every one
to six months. This debt is not freely tradable and cannot be purchased by the Company at prices other than the
outstanding balance plus accrued interest. The Company has categorized this at level 2 on the fair value
measurement hierarchy.
31
The fair value of the $600 million bond and the NOK1500 bond are based at the price it is trading at on June 30,
2015 and December 31, 2014. The Company has categorized this at level 1 on the fair value measurement
hierarchy.
The fair value of the loan provided by Ship Finance to SF Linus is estimated to be equal to the carrying value as
the loan was entered into on arm's length terms and accrues interest which is repaid quarterly. This debt is not
freely tradable and cannot be purchased by the Company at prices other than the outstanding balance plus
accrued interest. The Company has categorized this at level 2 on the fair value measurement hierarchy.
Financial instruments that are measured at fair value on a recurring basis:
Assets
Currency forward contracts
Interest rate swaps
Liabilities
Currency forward contracts
Interest rate swaps
Interest rate swaps qualified for hedge
accounting
Cross currency swap
Fair value
hierarchy
June 30, 2015
Fair
Carrying
value
value
December 31, 2014
Fair
Carrying
value
value
Level 2
Level 2
0.6
2.0
0.6
2.0
—
2.7
—
2.7
Level 2
Level 2
Level 2
—
33.4
3.0
—
33.4
3.0
8.4
36.6
2.5
8.4
36.6
2.5
Level 2
76.2
76.2
64.4
64.4
US GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and
should be determined based on the assumptions that market participants would use in pricing the asset or liability.
As a basis for considering market participant assumptions in fair value measurements, US GAAP establishes a
fair value hierarchy that distinguishes between market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable inputs that are classified within levels one and two
of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable
inputs classified within level three of the hierarchy).
Level one input utilizes unadjusted quoted prices in active markets for identical assets or liabilities that the Company
has the ability to access. Level two inputs are inputs other than quoted prices included in level one that are
observable for the asset or liability, either directly or indirectly. Level two inputs may include quoted prices for
similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability, other
than quoted prices, such as interest rates, foreign exchange rates and yield curves that are observable at commonly
quoted intervals. Level three inputs are unobservable inputs for the asset or liability, which are typically based
on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination
of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the
fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Company's assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.
The fair values of interest rate swaps, cross currency swaps and forward exchange contracts are calculated using
the income approach, discounting of future contracted cash flows on LIBOR and NIBOR interest rates.
As of June 30, 2015 and December 31, 2014 liabilities or assets related to financial and derivative instruments
are presented at gross amounts where the Company does not have the right of offset. The amounts are included
in our fair value table above.
32
Credit risk
The Company has financial assets, including cash and cash equivalents, restricted cash, other receivables and
certain amounts receivable on derivative instruments, mainly forward exchange contracts and interest rate swaps.
These assets expose the Company to credit risk arising from possible default by the counterparty. The Company
considers the counterparties to be creditworthy financial institutions and does not expect any significant loss to
result from non-performance by such counterparties. The Company, in the normal course of business, does not
demand collateral.
The credit exposure of interest rate swap agreements, currency option contracts and foreign currency contracts
is represented by the fair value of contracts with a positive fair value at the end of each period, reduced by the
effects of master netting agreements. It is the Company's policy to enter into master netting agreements with the
counterparties to derivative financial instrument contracts, which give the Company the legal right to discharge
all or a portion of amounts owed to a counterparty by offsetting them against amounts that the counterparty owes
to the Company.
Note 19 – Commitments and contingencies
Purchase Commitments
As of June 30, 2015, the Company had one contractual commitment under a newbuilding contract. The
contract is for the West Rigel semi-submersible rig which is scheduled to be delivered in Q4 2015.
The maturity schedule for the remaining payments is as follows:
June 30,
2015
2015
Total
455.0
455.0
Legal Proceedings
From time to time we are a party, as plaintiff or defendant, to lawsuits in various jurisdictions for demurrage,
damages, off-hire and other claims and commercial disputes arising from the construction or operation of our
drilling units, in the ordinary course of business or in connection with our acquisition or disposal activities. We
believe that the resolution of such claims will not have a material impact individually or in the aggregate on our
operations or financial condition. Our best estimate of the outcome of the various disputes has been reflected in
our financial statements as of June 30, 2015.
In December 2014, a purported shareholder class action lawsuit, Fuchs et al. v. Seadrill Limited et al., No. 14cv-9642 (LGS)(KNF), was filed in US Federal District Court in the Southern District of New York, alleging, among
other things, that Seadrill and certain of its executives made materially false and misleading statements in
connection with the payment of dividends. In January 2015, a second purported shareholder class action lawsuit,
Heron v. Seadrill Limited et al., No. 15-cv-0429 (LGS)(KNF), was filed in the same court on similar grounds. In
March 2015, a third purported shareholder class action lawsuit, Glow v. Seadrill Limited et al., No. 15-cv-1770
(LGS)(KNF), was filed in the same court on similar grounds. On March 24, 2015, the court consolidated these
complaints into a single action. On June 23, 2015 the court appointed co-lead plaintiffs and co-lead counsel and
ordered the co-lead plaintiffs to file a single consolidated amended by complaint by July 23, 2015. The amended
complaint was filed on July 23, 2015 including North Atlantic Drilling as a defendant. It alleges, among other
things, that Seadrill Limited, North Atlantic Drilling and certain of their executives made materially false and
misleading statements in connection with the payment of dividends, the failure to disclose the risks to the Rosneft
transaction as a result of various enacted government sanctions and the inclusion in backlog of $4.1 billion
33
attributable to the Rosneft transaction. Although we intend to vigorously defend this action, we cannot predict the
outcome of this case, nor can we estimate the amount of any possible loss. Accordingly, no loss contingency has
been recognized within the financial statements.
Note 20 - Variable Interest Entity (VIE)
As of June 30, 2015, the Company leased a jack-up rig from the VIE under a finance lease. The shares in North
Atlantic Linus Ltd, which owned the jack-up rig, was sold by the Company to Ship Finance Ltd on June 30, 2013,
while the West Linus rig was simultaneously leased back by the Company on a bareboat charter contract for a
term of 15 years. The Company has four options to repurchase the unit during the charter period, and an obligation
to purchase the asset at the end of the 15 year lease period.
The Company has determined that the Ship Finance subsidiary, which owns the rig, is a VIE, and that North
Atlantic is the primary beneficiary of the risks and rewards connected with the ownership of the rig and the charter
contract. Accordingly, the VIE is consolidated in our financial statements. The Company did not record any gain
or loss from the sale of the shares, as the assets and liabilities continued to be reported at its original cost in the
Company's balance sheet at the time of the transaction. At June 30, 2015, the asset is reported under Drilling
unit in the Company’s balance sheet. Refer also to Note 17 - Related party transactions for additional details
about the sales and leaseback contract.
The following table gives a summary of the sale and leaseback arrangement, as of June 30, 2015:
Unit
West Linus
Effective
from
Sale value
(in US$
millions)
First repurchase
option
(in US$ millions)
June 2013
600
370
Month of first
repurchase
option
On the 5th
anniversary*
Last repurchase
option
(in US$ millions)
170
Month of last
repurchase
option
On the 15th
anniversary*
* Anniversaries of the Drilling Contract Commencement Date
Ship Finance has a right to require North Atlantic Drilling to purchase the rig on the 15th anniversary for the price
of $100 million if North Atlantic doesn’t exercise the final repurchase option.
The bareboat charter rate is set on the basis of a Base LIBOR Interest Rate for the bareboat charter contract,
and thereafter adjusted for differences between the LIBOR fixing each month and the Base LIBOR Interest Rate
for the contract. A summary of the bareboat charter rate per day is given below. The amounts shown are based
on the Base LIBOR Interest Rate.
(In thousands of US$)
Unit
West Linus
Base LIBOR
interest rate
1%
2016
222
2017
222
34
2018
222
2019
173
2020
140
The assets and liabilities in the accounts of the VIE as at June 30, 2015 are as follows:
2015
2014
Investment in Finance Lease
Total assets
Current position of long-term debt
Short-term related party liability
Total current liability
Interest bearing debt
Long-term debt due to related parties
Derivative instruments - payable
Total non-current liabilities
553.1
553.1
574.5
574.5
51.5
30.0
81.5
51.5
—
51.5
326.0
125.0
3.0
454.0
399.7
110.7
2.5
512.9
Accumulated Other Comprehensive Income
Retained earnings
(2.8)
20.4
(2.3)
12.4
Total stockholders' equity
17.6
10.1
Total liabilities and stockholders' equity
553.1
574.5
Book value of the drilling unit in the Company’s consolidated accounts
570.4
581.0
Historically the Company presented balances due to/from Ship Finance on a gross basis. From June 30, 2015
the Company have elected to represent this on a net basis, due to the fact that the right of offset is established
in the long-term loan agreements, and the balances are intended to be settled on a net basis, providing a more
appropriate description of the Company’s related party net debt position. Accordingly the Company has
represented $14.3 million from Amounts due from related parties (Current assets) and offset against Long-term
debt due to related parties (Non-current liabilities). There is no corresponding offsetting impact as at June 30,
2015 as the short term trading balances are in a liability position of $30.0 million.
Note 21 - Subsequent Events
The Company secured a contract extension for the semi-submersible rig West Phoenix with Total, commencing
mid-March 2016 and securing work for the unit through the end of August 2016. The total revenue potential for
the contract extension is approximately $62 million. A portion of the $62 million will be paid during the currently
anticipated idle period from the beginning of September 2015 to the middle of March 2016. The Company has
the ability to market the rig for alternate work during this period. As part of the agreement to extend the West
Phoenix, the Company has agreed to a dayrate reduction on the current contract effective from June 1, 2015
until its expected conclusion at the end of August 2015, resulting in a reduction to the remaining revenue potential
of approximately $16 million.
35

Second quarter 2015 report

Transcription

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